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March 03, 2010 at 07:00 PM
WASHINGTON–Broker-dealers and advisors can only be paid on a “level-fee” basis for providing investment suggestions to retirement plan beneficiaries under a revised rule proposed by the Obama administration Friday.
The mandate for level-fee payments both for the actual advisor and the broker-dealer is the key change distinguishes the proposed rule from rules implementing a 2006 law passed by Congress, as proposed by the Bush administration; and the rules proposed for comment by the Obama administration.
The law is the Pension Protection Act of 2006.
Another final rule published by the Department of Labor establishes new guidelines for the disclosure of funding and other financial information to workers participating in multi-employer retirement plans (i.e., those collectively bargained by unions and groups of employers).
According to a DOL official, “[The DOL rule] will ensure transparency by guaranteeing that workers can better monitor the financial condition and day-to-day operations of their retirement investments.” The DOL rule goes into effect in April 2010.
The investment advice rule is being published for comment this week in The Federal Register. Comments will be accepted through May 2.
Under the revised proposed regulation respecting investment advice employers who allow outsiders to provide investment advice to beneficiaries of 401(k)s and individual retirement accounts can be protected from liability in the event the investments don’t perform well–but only if the advice is provided through two means.
One is through the use of a computer model certified as unbiased. The other is through an advisor compensated on a “level-fee” basis (wherein fees do not vary based on investments selected by the participant).
According to officials of the National Association of Insurance and Financial Advisors, the computer model arrangement will qualify under the statutory exemption if it is based on generally accepted investment theories.
The theories must factor in historic risk and return data of different investments over defined periods of time; plus investment management and other fees and expenses attendant to the recommended investments, the official said.
Under the proposed rule, investment advisors must also comply with annual notice and audit requirements. They also must provide, at no charge, information regarding the advisor’s fees and relationships with others involved in the selection and management of the participant/beneficiary’s investment choices.
